Issue 5 (November 1996)

New ruling on public admin staff and TUPE
Same rights for temporary staff
EAT deducts half invalidity benefit
Injunction hits the buffers
Court condemns abuse of appeal
Cases head for the ECJ
EAT adds another twist
Protection when only part transfers
Protective awards "made worthless"

Protective awards "made worthless"

Potter and others v Secretary of State for Employment, Court of Appeal 30 September 1996

The Court of Appeal dealt a severe blow to former Swan Hunter shipyard workers seeking compensation - a protective award - for a failure to properly consult on redundancies announced after the company went into receivership. The decision has made many protective awards worthless, and not just for those employed by Swan Hunter.

The perverse result of the court's decision is that the greater the length of service and the greater the breach of the law by the receivers, the less protection individuals have. The unions are seeking leave to appeal to the House of Lords.

Swan Hunter went into receivership on 13 May 1993. The receivers, Price Waterhouse, promised the unions that workers would be paid and that work would continue. A week later Price Waterhouse issued a media statement saying they were seeking 300 redundancies. On 28 May they summarily dismissed 400 staff.

Unions pursued claims for protective awards. The Newcastle Industrial Tribunal held that it was difficult to imagine a more clearcut default: the receivers in this case had made no attempt to consult on the redundancies. They awarded a maximum of 90 days compensation.

But because the company was technically insolvent the receivers had no obligation to make any payments, leaving the Secretary of State for Employment to pick up the bill. The Secretary of State cut the payments by making a whole series of deductions leaving many workers with nothing and the highest award at £1,640.

Seven test cases were launched claiming that the various deductions and limits were unlawful and in breach of the European Insolvency Directive. These claims were successful at the IT.

The Employment Secretary appealed to the Employment Appeal Tribunal which upheld parts of the appeal. The EAT held that the Secretary of State was entitled to limit the protective award to a maximum of 8 weeks and to limit the pay out to a maximum of £205 per week (the statutory redundancy pay limit), but was not entitled to deduct notice pay from the awards. The unions appealed as did the Employment Secretary.

There were 3 issues to be dealt with by the Court of Appeal: was the limit of a week's pay at £205 per week in accordance with the Insolvency Directive; was the Government entitled to deduct notice pay from the award and; if there was a breach of the directive could individuals pursue Francovich claims against the Government in the Industrial Tribunal.

The court decided that, if there was a Francovich claim, then this had to be pursued in either the High Court or the County Court and could not be pursued in an Industrial Tribunal.

The Court of Appeal held that it was not clear that the £205 limit was in accordance with the objective of the Insolvency Directive and would have considered referring the matter to the European Court of Justice. The court decided this was not necessary because the individuals who pursued test cases were not entitled to any protection under the Insolvency Directive and thus the £205 limit was irrelevant. The core of the court's decision was that entitlement to guaranteed payments under the Insolvency Directive depended upon the date of dismissal. The court held that the protection under the Insolvency Directive only related to payments for a period before the dismissal.

As the protected period ran from 28 May, which was the date of dismissal, the staff were only entitled to have their pay protected for that day, for which they had already been paid. This, of course, means that the more flagrant the breach of law by the receivers the less the protection for the individuals concerned.

This is a disappointing decision for Swan Hunter workers which will also have a major impact on thousands of other workers. The Government subsequently changed the law so that set offs for notice money cannot be made. But the court's interpretation of the extent of the protection under the Insolvency Directive will still have an on-going effect unless the House of Lords allows the appeal.